The 3 Biggest Expenses You Need to Save for in Retirement

Eshani Haque

As you step into retirement, some of your expenses will shoot up while others will go down. For instance, you can expect your transportation and clothing costs to decrease, as you will no longer be commuting to an office or buying office apparel. On the other hand, staying at home most of the time will quite naturally make you use more of house-related utilities and these expenses will jump. Moreover, it is nothing new that healthcare expenses rise in your golden years.

Does that mean your pre- and post-retirement expenses will eventually be the same? Well, there is good news. The Bureau of Labor Department’s 2017 data shows a significant drop in household expenditures in retirement. Average annual household spending for people under the age of 55 is $57,725. The expenditure is a little higher at $58,709 for people between the age group of 55 and 64. For people predominantly in the retirement age, i.e., 65-75 years, spending drops sharply to $46,295. Meanwhile, those in the 75+ age group tend to spend $36,717 on average annually.

However, on a cautionary note, Fidelity says you can expect to spend approximately 55-80% of your current annual income in retirement based on your lifestyle and its associated costs. This alarming projection calls for retirees to be prepared for it well in advance.

Here, we have shortlisted three main expenses that will dominate your retirement.

Healthcare: With rising life expectancy and healthcare inflation, you can expect your medical expenses to be some of the biggest in retirement, and they will most likely increase with age. Fidelity Investments estimates a couple aged 65 in 2019 to spend approximately $285,000 on healthcare in retirement. This estimate, which involves $150,000 for women and $135,000 for men, includes Medicare coverage only.

Although Medicare does cover a wide range of healthcare aspects, it does not include most dental care and hearing aids. While dental checkups may become part and parcel of your life in retirement, statistics show that approximately 25% of people aged 65-74 and 50% of those who are 75 or older have disabling hearing loss. So, if these health concerns happen to grip you in your declining years, you can expect your overall healthcare costs to swell up.

Another healthcare issue you need to keep in mind is long-term care (not included in Medicare), i.e., when you are no longer able to function on your own and need help with day-to-day tasks such as eating, dressing, bathing etc. Per the U.S. Department of Health and Human Services, a 65-year-old has an approximately 70% chance of requiring some sort of long-term care in their later years. A prolonged period of assisted living is likely not very appealing, and the costs associated with it can have a heavy bearing on their retirement budget. One way to avoid the exorbitant costs would be to buy a long-term care insurance policy before you hit retirement age.

Moreover, to tackle overall healthcare costs, a good idea is to contribute to a health savings account (HSA) in your working years as these are highly tax advantaged. The contributions you make will be deducted from your taxable income and your earnings will grow tax free. To add to it, you can even make tax free withdrawals for qualified healthcare expenses. However, you need to have a high-deductible healthcare plan in place to be eligible to put your money in an HSA.

Housing: Data from several sources have shown that housing expenses occupy the lion’s share of household expenditures throughout a person’s lifetime. Although an analysis of the Bureau of Labor Department’s consumer expenditure survey data for 2017 shows a steady decline in average annual housing expenses as a person ages, the individual numbers are quite massive when compared to expenses on other items.

For instance, average annual housing expenditures for people under the age of 55 stands at $19,220. The same for people within the age group of 55-64 slides to $17,397 and further to $15,223 for those in the age group of 65-74. Meanwhile, those individuals above the age of 75 spend approximately $13,190 on housing.

The down-trending figures reflect that retirees are perhaps well prepared to overcome the hefty costs associated with housing through downsizing or relocating to more economical places within the country or abroad. Another factor that supports the decline in housing costs is that retirees are most likely to have paid off their mortgage.

So, what accounts for the inflated figures? Despite moving to a smaller apartment in a cheaper locale and paying off your mortgage on time, costs associated with property taxes, insurance, utilities, repairs and maintenance are inevitable and these can be quite overwhelming.

Taxes: Taxes are pretty much unavoidable, even in retirement. The biggest source of retirement income — social security — is taxable in most cases up to 85% of the benefit. Moreover, income from traditional 401(k) or IRA accounts will be taxed at the regular income tax rate. Even your pension income will not be free from taxation.

You can expect to not be taxed on social security benefits if that is your sole source of income. Also, if you have money stacked in Roth retirement accounts, you can get tax-free withdrawals since these were funded with post tax dollars. However, the account must be open for at least five years before you are eligible for it.

As most Americans have several sources of retirement income, heavy tax expenses in retirement is quite the norm. But there are various ways in which you can reduce your tax bills in retirement. One such way is to convert your traditional 401(k) or IRA accounts into a Roth IRA, which does not tax your withdrawals. Also, traditional 401(k)s and IRAs require you to take the required minimum distribution (RMD) past the age of 70 ½, under which you will be taxed on the amount withdrawn. However, Roth IRAs do not involve RMDs.

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